Question

_______blank arises from volatile changes in exchange rates.

a. Translational exposure
b. Transactional exposure
c. Foreign exchange risk

Answer 1

Foreign exchange risk arises from volatile changes in exchange rates. It includes transactional exposure and translational exposure.

Step-by-step explanation:

Foreign exchange risk arises from volatile changes in exchange rates. It refers to the potential loss or gain that a company may experience due to fluctuations in currency values when conducting international transactions. There are two types of foreign exchange risk: transactional exposure and translational exposure.

1. Transactional exposure occurs when a company has outstanding financial commitments in foreign currencies, such as accounts payable or receivable. Changes in exchange rates can affect the value of these transactions.
2. Translational exposure arises when a company consolidates financial statements from its foreign subsidiaries into its reporting currency. Fluctuations in exchange rates can impact the translation of these financial statements and result in gains or losses.

For example, if a U.S. company imports goods from Japan and pays in Japanese yen, a depreciation of the yen against the U.S. dollar would increase the cost of the imported goods for the U.S. company, resulting in transactional foreign exchange risk.